ELI5 What are Tokenized Funds?

on January 6, 2020

Imagine investing in a cryptocurrency token that is automatically tied to an investment fund somewhere. Something like owning shares of a startup but instead of signing papers and joining venture capitalist funds all you had to do was to buy some cryptocurrency tokens?

This isn’t just theory, it’s the reality of tokenized funds.

Tokenized Funds

So, how does it work?

Investopedia has a nice article about tokenized equities, you can read that for a decent intro. But here’s my shortened and admittedly more synthesized take.

Technically there’s nothing new under the hood. A fiat money fund will issue tokens via a smart contract running on Ethereum or some other 2nd generation crypto. The real difference is in the bureaucracy involved: these tokens will legally represent shares in a fund that invests in startups or other equities. If the fund has 1000 shares, perhaps 1000 tokens will be issued.

Each token represents one share.

The smart contract will reflect this business rule so everyone can check the blockchain for compliance. The fund will only be able to issue more shares and tokens when the board authorizes it, typically when more funds are raised.

Regulation

If there’s nothing technically different between a tokenized fund and other various tokens, then as you can imagine the difference will be in the regulatory framework.

Starting an investment fund in Europe or USA is not a simple task. Regulatory requirements are strict. But as with everything else in cryptos, you can start a fund anywhere in the world. Ideally you’d choose a crypto-friendly nation.

Currently the nations attracting most crypto investments are British Virgin Islands, Singapore, Bermuda, Malta and Cayman Islands.

You can search for specifics on each of these nations – there’s plenty of material available on how to start your tokenized fund in these territories. (The purpose of this article is to give you an overview, so we won’t go into all the nitty gritty details.)

It’s Attractive!

Last year over U$ 21 billion were raised by token emissions! It’s a lot of money, especially considering that most Fortune 500 companies started out with thousands of times less capital than that. There’s enormous potential in tokenized funds.

It’s also so easy to buy and sell these tokens – if you stick to cryptocurrency-only you might not even need to do KYC in some exchanges (though admiteddly in most US and Europe based exchanges you’ll have to submit ID and passport).

Now this is where it gets really exciting: when you’re buying or selling a fund token, you’re actually selling a piece of a startup or established company somewhere! It’s the definitive union between ICO’s and venture capital. That symbol stored in some blockchain actually represents a piece of something and it may become really really valuable one day.

If Apple, Microsoft, Facebook and others were funded with primitive instruments and got this big a few decades later, can you imagine the potential of tokenized funds? Raising money for great ideas globally? This is the future. If I’ve ever said that before, I’d never said it with this much confidence.

Stay tuned for developments in tokenized funds – this is big and it’s very likely to explode in the coming years.

References

Where to set up a tokenized fund – Lots of infos on various places and their specific regulations.

Crypto 20 Tokenized Fund – Example of a tokenized fund (this is not a recommendation – for information purposes only)

Tokenized capital funds explained – Great intro on the topic

Panel discussion about tokenized funds at StartEngine

A large list of security token funds